Modernization Could Drive 20% Earnings Growth Here

Dan Romanoff: We see wide-moat Guidewire as an interesting long-term investment opportunity in the mid-cap space. The underlying growth thesis revolves around a modernization theme for the core software systems the P&C insurance industry uses. We think both the initial penetration and subsequent cross-selling opportunities are tremendous, given so many carriers lack a modern core system and the advanced add-on features that go alongside it. We see earnings growth compounding at 20% for a decade, as the company has low-single-digit market share in at least a $10 billion market. Our fair value estimate is $117 per share and implies a P/E of 65 times on adjusted 2020 earnings.

Guidewire is the largest software provider focused exclusively on the property and casualty insurance market. It provides the core operational software suite that allows a P&C insurance company to analyze risk, write policies, collect premiums, manage the claims process, manage an army of agents, create new products, do business in a digital world, and help perform related financial and statutory reporting. The three main pillars of its solutions are ClaimCenter, BillingCenter, and PolicyCenter, but Guidewire has been busy introducing important new solutions in the last couple years, including predictive analytics, digital portals, and, more recently, a move to the cloud.